TIRANA, Feb. 19 – Yields on government securities dropping to historic lows and Europe’s single currency losing considerable ground against the Albanian lek led to a new contraction in the emerging investment funds in 2018, the second since their launch in early 2012.
A report by Albania’s Financial Supervisory Authority shows the launch of two new collective investment undertakings that increased the number of investment funds to five was unable to attract new investors whose numbers dropped by an annual 1,900 to 29,400 at the end of 2018.
Net assets in the five operational Austrian and Albanian-owned investment funds dropped to around 66 billion lek (€535 mln at a euro to lek exchange rate of 123.45), down 9 percent compared to 2017 when the market grew by 11 percent to overcome a modest 2.3 percent decline in 2016 after the then three operational collective funds suffered their first contraction following four years of strong double-digit growth.
The contraction was fuelled by yields on government securities hitting new lows after Albania’s central bank cut the key interest rate to a new all-time low of 1 percent in mid-2018 and Europe’s single currency losing around 7 percent against the Albanian lek in deprecation that sharply waned interest to invest in the sole fund offering Euro-denominated investment opportunities.
The emerging investment fund market is dominated by investments in risk-free government bonds and T-bills, but a fifth of their assets is also invested in corporate bonds and other assets such as shares, cash etc, placing investors at various degree risk.
Yields on 2-year notes, the government’s key instrument for long-term debt in the domestic market and where investment funds heavily invest around two-thirds of their assets, dropped to 1.94 percent in December 2018, down from 3.25 percent in late December 2017 and a historic low of 1.5 percent in mid-2016.
Meanwhile, yields on 12-month T-bills, the government’s key instrument for internal borrowing and where investment funds invest around 18 percent of their assets, dropped to 1.36 percent in late December 2018, on a constant downward trend after climbing to 2.77 percent late December 2017.
With ample liquidity amid poor demand for credit and tight lending standards, yields on 12-month T-bills further dropped to 1.27 percent in early February and are about to break an all-time low of 1.24 percent in mid-2016 soon after the central bank cut the key rate to 1.25 percent.
Europe’s single currency having lost about 7 percent against the Albanian lek in 2018 also slightly artificially led to lower assets at the end of 2018 due to the financial watchdog reporting assets in the local currency.
Austrian-owned Raiffeisen Euro, whose assets are denominated in Europe’s single currency, saw its market share drop by around 5 percent to 15 percent in 2018, with the contraction partly attributed to Euro’s free fall.
Market decline
Offering higher return rates compared to traditional investment opportunities such as bank deposits, investment funds registered strong double-digit growth rate until 2016 when they suffered their first modest contraction before returning to considerable growth of 11 percent again in 2017.
Operational since early 2012, the two initial Austrian-owned Raiffeisen-run investment funds and Credins Premium, an Albanian-owned fund operational since late 2016, have increased their market share to about 5 percent of the GDP, but yet account for only 7 percent of the bank deposits.
Two new investment funds, including North Macedonian-Austrian-owned WVP Top Invest and a new Raiffeisen-owned Raiffeisen Vizion launched operations last year.
Austrian-owned Raiffesein Invest, which manages three investment funds, reported profits of 153.5 million lek (€1.2 million) at the end of 2018.
Austria’s Raiffesen Bank was the country’s largest commercial bank for about a decade until 2013 when it lost its leading position after gradually lowering exposure to Albania’s domestic public debt following the 2008-09 global financial crisis, but later diversified its portfolio in the country’s emerging investment and pension funds.
Profits for majority Albanian-owned Credins Invest were quite modest at around €30,000 while newly launched WVP Top Invest, where investors of Albanian roots hold a majority stake, posted modest losses during its first year of operations.
Majority Albanian-owned Credins Bank is the third largest commercial bank in Albania, with investment also in the emerging private pension market.
New investment opportunities
The market decline also comes at a time when Albanian investors seem to have been lured by risky digital currency investment despite warnings by the country’s financial institutions.
Several unlicensed brokerage firms have disappeared without trace after defrauding investors or had their operations closed down after warnings by supervisory authorities in the past couple of years.
Last year, Prime Minister Edi Rama unveiled the Albanian government is mulling a regulatory framework on crypto-currencies in a bid to diversify investment opportunities in the country in an innovative sector that could create well-paid jobs and turn Albania a hub for such investment in a Western Balkan region that still remains skeptical to digital currency.
In previous years, when investment funds gained considerable ground, investors commonly withdrew deposits to invest in the emerging funds offering higher return rates compared to traditional deposits whose interest rates have now dropped to slightly above zero.
New investment opportunities in the government securities market might have also affected the performance of the emerging investment funds.
In early 2018, the Albanian Securities Exchange also launched its operations as the country’s first privately-owned stock exchange, initially trading only Albanian government securities before also turning to corporate bonds later.
Currently, only a handful of financial institutions, the majority of which with Albanian capital and shareholders in the stock exchange, have been listed on the Albanian Securities Exchange, licensed by the country’s Financial Supervisory Authority as an alternative investment and borrowing opportunity.
